Lloyds Banking Group, Barclays PLC and other bank shares jump as Bank

The Bank of England has raised interest rates for the first time since the start of the coronavirus pandemic, as concerns about rising inflation outweighed worries about the negative effect of the omicron variant on the economy.

The central bank’s monetary policy committee (MPC) lifted rates from 0.1% to 0.25%.

Among the immediate effects on financial markets, shares in the UK’s big banks shot up, with Lloyds Banking Group PLC (LSE:LLOY) rising 4.6%, Barclays PLC (LSE:BARC) 4.3%, NatWest Group PLC (LSE:NWG) 3.4% and Virgin Money UK PLC (LSE:VMUK) 3.3%.

The MPC members voted eight to one to raise rates, while there was a unanimous vote to keep the asset purchase programme (quantitative easing/QE) at £875bn a month.

Explaining the decisions, the Bank said: “Since the November MPC meeting, the Omicron Covid variant has emerged. It appears to be spreading rapidly within the United Kingdom and around the world…

“The level of global GDP in 2021 Q4 is likely to be broadly in line with the November Report projection, but consumer price inflation in advanced economies has risen by more than expected. The Omicron variant poses downside risks to activity in early 2022, although the balance of its effects on demand and supply, and hence on medium-term global inflationary pressures, is unclear. Global cost pressures have remained strong…

“At its November meeting, the Committee judged that, provided the incoming data, particularly on the labour market, were broadly in line with the central projections in the November Monetary Policy Report, it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target. Recent economic developments suggest that these conditions have been met. The labour market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures. Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage.” 

The committee said it judged that an increase in the Bank Rate was “warranted”.

The Bank also cut its expectations for UK gross domestic product growth in the fourth quarter of 2021 by around half a percent since the November report, leaving GDP around 1.5% below its pre-Covid level.

On inflation, it noted that CPI inflation in November was up 5.1% on a year before, up from 3.1% in September, with a significant upside in prices for core goods and, to a lesser extent, services.

The Bank said it expects inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022 as utility bill increases come through from the effect of elevated wholesale gas prices.

“CPI…